Uber and Lyft IPOs could mean the end of cheap rides

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Here's the kicker: "To get to profitability, ride-hailing companies will have to get rid of drivers or raise prices, and they are likely to do both "

One of the biggest pressures is Uber’s relationships with its drivers, who went on strike worldwide Wednesday to protest the company’s business model ahead of its IPO. The drivers argue that Uber’s business model enriches company executives at the expense of its low-paid drivers, who are contractors, and not full-time employees with benefits (this issue is at the heart of several lawsuits that seek to get drivers classified as employees). Uber offers incentives to drivers to join, hurting its bottom line even further, and rider discounts. In the company’s S1, it said it increased driver incentives and promotions in the first quarter to maintain its competitive market position, and noted that it expects its driver relations to get worse.

“As we aim to reduce driver incentives to improve our financial performance, we expect driver dissatisfaction will generally increase,” the company said. It also noted that as it continues to invest in self-driving cars, “it may add to driver dissatisfaction over time, as it may reduce the need for drivers.”

“Getting profitable by squeezing down costs is going to create even further problems, with the high turnover rate with drivers and challenge the new drivers so they can expand,” said Larry Mishel, distinguished fellow at the Economic Policy Institute in Washington. “There are huge contradictions at the heart of their business model.” Last year, Mishel worked on a study of Uber drivers and concl...

Here's the kicker: "To get to profitability, ride-hailing companies will have to get rid of drivers or raise prices, and they are likely to do both "

One of the biggest pressures is Uber’s relationships with its drivers, who went on strike worldwide Wednesday to protest the company’s business model ahead of its IPO. The drivers argue that Uber’s business model enriches company executives at the expense of its low-paid drivers, who are contractors, and not full-time employees with benefits (this issue is at the heart of several lawsuits that seek to get drivers classified as employees). Uber offers incentives to drivers to join, hurting its bottom line even further, and rider discounts. In the company’s S1, it said it increased driver incentives and promotions in the first quarter to maintain its competitive market position, and noted that it expects its driver relations to get worse.

“As we aim to reduce driver incentives to improve our financial performance, we expect driver dissatisfaction will generally increase,” the company said. It also noted that as it continues to invest in self-driving cars, “it may add to driver dissatisfaction over time, as it may reduce the need for drivers.”

“Getting profitable by squeezing down costs is going to create even further problems, with the high turnover rate with drivers and challenge the new drivers so they can expand,” said Larry Mishel, distinguished fellow at the Economic Policy Institute in Washington. “There are huge contradictions at the heart of their business model.” Last year, Mishel worked on a study of Uber drivers and concluded that their W-2 equivalent hourly wage is less than what 90% of U.S. workers earn. “Our results indicate that Uber drivers earn low wages and compensation and the total hours and compensation in the gig economy represent a very small share of total hours and compensation in the overall economy,” Mishel’s study said.

Comments

Anyone who has studied game theory knows how this is going to go. They can't raise prices. Uber and Lyft are settled at a Nash Equilibrium. It's going to be a looong time before either one is profitable, and it will take some sort of major shake-up in the industry for that to happen.

Basically what Rich said. If either side raises prices, they will lose, since all the business will go to the other one. But they also can't lower prices any more. This is due to a lot of factors, such as (obviously) their revenue, but also whether drivers will accept lower pay (no), how much of a loss investors are willing to bear, etc. So they are at a stable equilibrium point, which sounds ok, except that they are really stuck there.

But, when I say it will take a major shake up to change this, a lot of people think the IPOs will be that catalyst. The pool of investors is suddenly blown up wide, and now the public has skin in the game and share prices are determined by a market. How much of a loss, if any, are shareholders willing to accept? Well, both IPOs flopped, which I think says something.

Uber has not given any predictions on when it may be profitable, but some investors are counting on profitability when it has fleets of self-driving vehicles, which would eliminate some costs of paying drivers. But self-driving cars are still in the early stages and even when they are completely self-driving, Uber will still have expenses for the technology and possibly the cars themselves.

“The idea that they can wait until there are autonomous vehicles [before they become profitable] is foolish, we are many years away from that. It is not clear that Wall Street and investors are going to wait that many years for them to become profitable,” Mishel said.

“As we aim to reduce driver incentives to improve our financial performance, we expect driver dissatisfaction will generally increase,” the company said. It also noted that as it continues to invest in self-driving cars, “it may add to driver dissatisfaction over time, as it may reduce the need for drivers.”

Letting the supply-and-demand take over will alter this industry forever It will eventually push all full-time workers and replace them with part-time gig workers. I am not necessarily saying that's a bad thing, but it will affect all consumers for sure.

We have to ask ourselves if this is what we want and whether we want the government to step in. I mean, do we want such transition to any other industry?

I'm not sure how far this can really extend though. All full time workers? I doubt it. Uber kind of hit a jackpot, by creating a gig worker economy out of skills that almost everyone has already (driving). But a lot of other full time jobs just won't fit into the gig worker economy. I wouldn't want to rely on whatever firefighters happen to be available when my house is burning down! And of course many higher skilled white collar jobs require a lot of training and rely heavily on tribal knowledge that can take years to build up. And, there is a lot of variance in the quality of employees. Companies want to keep the good ones, so they offer full time jobs with benefits. There is already the concept of contractors in white collar jobs, who are typically cheaper for a company than a full time employee. Yet most employees are still full time.

It depends on whether we want an experienced skilled worker that makes a living in that particular industry. Nurses and doctors? No way. Pilots, lawyers, plumbers and electricians? Nope. Lawn mowers, store clerks, waitresses? Yep.

Many professions are already part-time or on-demand basis. Firefighters often employ volunteer or part-time staff. Waitresses and grocery staff are all pretty much contractors and gig-workers anyway.

You also have to think about automation. Customer service reps will be replaced with computers. Uber drivers will be replaced with robo cars. :)

IMO, autonomous cars (except for designated routes) are YEARS away. However there will now be tremendous pressure on Uber/Lyft to at least lose less money and demonstrate that they're heading in the direction of profitability. The easiest way will be to gradually increase pricing through their guaranteed price system. The driver will definitely make no more, but the company will get more - MUCH more eventually.

Uber and Lyft are competitors, but trust me on this because i've seen it happen every time there was a change in Uber's pricing model, if Uber were to increase pricing Lyft will follow within a week. Uber sets the standard for pricing so all this competition talk is a figment of folks imagination. Let's be real, you think the drivers would continue to drive for ANY company that paid them less than the other while providing the same service??? LOL.. i think not, so there really IS NO competition to speak of at present.

IMO, autonomous cars (except for designated routes) are YEARS away. However there will now be tremendous pressure on Uber/Lyft to at least lose less money and demonstrate that they're heading in the direction of profitability. The easiest way will be to gradually increase pricing through their guaranteed price system. The driver will definitely make no more, but the company will get more - MUCH more eventually.

Uber and Lyft are competitors, but trust me on this because i've seen it happen every time there was a change in Uber's pricing model, if Uber were to increase pricing Lyft will follow within a week. Uber sets the standard for pricing so all this competition talk is a figment of folks imagination. Let's be real, you think the drivers would continue to drive for ANY company that paid them less than the other while providing the same service??? LOL.. i think not, so there really IS NO competition to speak of at present.

The unfortunate truth is, Uber will NEVER pay the drivers more until they are forced to do so - and the ONLY thing that will force them will be if they are unable to secure new drivers to replace those that have left the pool.